INFORMATION DISCLOSURE AND FINANCIAL PERFORMANCE
A CASE STUDY OFSTANBIC BANK
MAINA LAWRENCE KARANJA
07/K/2843/EXT
A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF
BUSINESS AND MANAGEMENT SCIENCES IN PARTIAL
FULFILLMENT FOR THE REQUIREMENTS OFTHE
AWARD OF A BACHELOR OF COMMERCE OF
MAKERERE UNIVERSITY
AUGUST2011
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DECLARATION
I hereby declare that this is my original work and it has never been presented to any university for any academic award. Where work of another individual has been used, acknowledgement has been duly given.
Signature: ………………………………… Date: ………………………………
Maina LawrenceKaranja
APPROVAL
This is to certify that this research “Information Disclosure and Financial Performance in Stanbic bank”has been under my supervision as the university supervisor.
Signature: ………………………...... Date: ………………………………….
Ms: Victoria .B. Nakku
(Supervisor)
DEDICATION
I dedicate this work to my dearest parents Mr. James Maina and Mrs. Jane Maina; my sisters Susan Nyambura and Damaris Wangari and my brother Hudson Warui since i cannot be able to thank youenough for all your support, love, wisdom and prayers.
ACKNOWLEDGEMENT
I give thanks to the almighty God who has been faithful and compassionate to me during my academic struggle. Glory is to him forever.
A tribute goes to my supervisor Ms. Victoria .B. Nakku for his valuable time, cooperation, guidance and effort devoted during supervision, all of which have contributed to the completion of this work.
I pay my gratitude to all lecturers I have met for all the many comments and suggestions which haven a source of great inspiration towards the accomplishment of the goals I set out to achieve.
I further extend my appreciation to Mr.Stephen Lukwagoand Uganda Stock Exchange team of brokers fortheir support and assistance without which it would have been impossible to carry out this research.
I would also like to thank all my friends who have been the source of my inspiration. I would like to thank in a special way, my friends Mary, Antony, Bernard and Peris, for their continued support in my research.
Lastly, I wish to thank all those whom I have not mentioned above and in one way or another have contributed to the success of this project. Thank You.
God bless you
ACRONYMS
IOSCOInternational Organization of Securities Commissions
IASInternational accounting standards
IASBInternational accounting standards board
USEUganda Stock Exchange
SBUStanbic bank Uganda limited
ROAReturn on Assets
ROEReturn on Equity
ROAReturn on Investment
TABLE OF CONTENTS
DECLARATION...... i
APPROVAL...... ii
DEDICATION...... iii
ACKNOWLEDGEMENT...... iv
ACRONYMS...... v
TABLE OF CONTENTS...... vi
LIST OF TABLES...... viii
ABSTRACT...... ix
CHAPTER ONE: INTRODUCTION
1.1 Background
1.2 Problem statement
1.3 Purpose of the study
1.4 Objectives of the study
1.5 Research questions
1.6 The scope of the study
1.6.1 Geographical scope
1.6.2 Conceptual framework
1.6.3 Subject scope
1.6.4 Time scope
1.7 Significance of the study
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 Information disclosure
2.2.1 Voluntary and mandatory disclosure
2.2.2 Information asymmetry
2.2.3 Disclosure quality: regulation, enforcement and compliance
2.3 Financial management
2.3.1 Business finance
2.4 Sharecapital
2.5 Financial performance
2.5.1 Gearing ratio
2.5.2 Profitability ratio
2.6 Information disclosure and financial performance
2.6.1 Profitability and information disclosure
2.6.2 Gearing and information disclosure
CHAPTER THREE: METHODOLOGY
3.0Introduction
3.1 Research design
3.2 Study population.
3.3 Sample size.
3.4 Sampling methods
3.5Data sources
3.5.1 Primary data
3.5.2 Secondary data
3.6. Data collection instrument
3.6.1 Questionnaires
3.7 Data processing, analysis and presentation
3.8 Limitation to the study.
CHAPTER FOUR: PRESENTATION, ANALYSIS AND DISCUSSION OF THE FINDINGS
4.1 Introduction
4.2 The demographic characteristics of the respondents
4.2.1 Findings on gender of the respondents
4.2.2 Findings on the age group of the respondents
4.2.3 Findings on academic qualifications of the respondents
4.2.4 Findings on the category of respondents
4.2.5 Findings on the period respondents have dealt with equity/ stock market
4.3 Findings on information disclosure as provided by stanbic bank
4.3.1 Findings on voluntary disclosures as provided by stanbic bank
4.3.2 Findings on transparency of financial reports
4.3.3 Findings on users of financial information can easily access it.
4.3.4 Findings on financial information presented is free from errors and significant bias
4.3.5 Findings on information disclosure is regularly made
4.3.6 Findings on disclosure meet the accounting and regulatory requirements
4.3.7 Findings on appropriatedisclosure reduce risk of being negatively viewed by the market
4.3.8 Findings on financial information is easily understood
4.3.9Findings on disclosures meet the true and fair criterion
4.4.1 Findings on the level of financial performance
4.5 Findings on the relationship between information disclosure and financial performance.
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
5.2 Summary of findings
5.2.1 Findings on information disclosure by stanbic bank
5.2.2 Findings on the level of financial performance of stanbic bank
5.2.3 Findings on the relationship between information disclosure and financial performance in stanbic bank uganda limited
5.3 Conclusion
5.4 Recommendations
5.5 Areas for future research
REFERENCES
APPENDICES
Appendix I: Questionnaires
Appendix ii: Introduction Letter………….…………………………………………..40
LIST OF TABLES
Table 1: Gender of Respondents………………………………………………….….
Table 2: Age of the Respondents………………………………………………….…
Table 3: Academic Qualifications of Respondents…………………………………..
Table 4: Category of Respondents…………………………………………….……..
Table 5: Period that Respondents have dealt with Equity/ Stock Market……………
Table 5: Showing whether Stanbic bank makes voluntary Disclosures to the market. …………………………………………………………………………...…...
Table 6: Transparency in Stanbic financial reports…………………………….…….
Table 7: Showing whether users of financial Information can easily access it….…..
Table 8: Showing whether Financial Information presented is free from errors and significantbias…………………………………………….………………...
Table 9: Showing whether Information is Regularly made………………………….
Table 10: Showing whether Disclosure meet the Accounting and Regulatory requirements……………………………………………..………………...
Table 11: Showing whether Appropriate Disclosure Reduce the risk of being negatively viewed by the Market…………………………………………..
Table 12: Showing whether Financial Information is easily understood………….…
Table 13: Showing whether Disclosures meet the true and fair criterion……………
Table 14: Showing Summary of Profitability and Gearing ratios computations….....
Table 15: Computation of Spearman Correlation Coefficient…………………….....
ABSTRACT
Information disclosure is the best way organizations communicate to market participants to help them make best investment decisions.Information disclosure is a mandatoryrequirement for all firms listed on the stock exchange for the purpose of raising long term finances through issuance of shares. This finance raised can be used for various company activities such as investment and working capital and hence improve on its financial performance. The study was guided by the following three research objectives: to establish whether there is proper information disclosure by Stanbic Bank, to assess the level of financial performance, and establish the relationship between information disclosure and financial performance.
A combination of descriptive and explanatory research designs were used by applying both qualitative and quantitative techniques targeting 30 brokers and institutional investors as the study population of whom 20 were selected using purposive sampling.
From the findings, the researcher noted that Stanbic bank voluntarily discloses information to the market, financial information is easily understood and users of financial information can easily access it. However, despite proper information disclosure, the financial performance indicated a decline in ROI and increase in gearing ratio; meaning that information disclosure is not a contributing factor. This is further emphasized by the low correlation coefficient of 0.253.
The researcher recommended that Stanbic bank should maintain the current information disclosure since it is proper for the purpose of raising long term finance through issue of share capital in the stock market;it should also utilize its assetsefficiently in order to maximize the return on assets to cut costs and enhance better financial performance.
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CHAPTER ONE
INTRODUCTION
1.1Background
Information has become the tool for authority and an important factor for development. Information is useful in economical, social, cultural, political, scientific and technological fields;because of the rapid development in economy during the last century and its vital role in the survival of nations. Information disclosure can be defined as the communication of information allowing economic actors to obtain information on a firm’s activities and condition (Dubbink, 2008). It is essential for investors as any to people in different professions in order keep pace with the developments achieved elsewhere.
On the other hand, financial performance refers to the subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time, (Vayrynen, 2007). There are many differentways to measurefinancial performance, but all measures should be taken in aggregation.This can be measured from various financial indicators such as profitability and gearing ratios. These ratios are presented in annual company reports in a friendly way to ensure easier interpretation by the user.
In public offering-policy discussion about corporate disclosure, more is typically judged better than less. In particular, better disclosure is seen as a way to reduce the agency problems that plague firms. Disclosure is also required while firms file for public offerings. In general, experience shows that companies committed to transparency and accountability help promote the long-term profitability of their investments (Huang, 2008). The separation of ownership and control in modern corporations motivates the need for managers to disclose relevant information to obtain financing from outside investors and to help current investors evaluate managerialactions. To obtain access to the public capital markets, firms must also agree to be subject to securities regulations, created and enforced by the Securities and Exchange Commission (SEC). These regulations make the disclosure of certain financial information mandatory, such as the audited financial statements (Schipper,[2007] for a discussion of required disclosures in financial reports).
Nevertheless, firms continue to exercise considerable discretion regarding the amount and content of disclosure within their mandatory reports.
Stanbic Bank Uganda Limited (SBU) is a subsidiary of Stanbic Africa Holdings Limited which is in turn owned by Standard Bank Group Limited. It is the largest commercial bank in the country and has the largest branch network. As of November 2006 Stanbic bank proposed a sale of 20% of the company to the public through an offer for sale and subsequent listing on the Uganda stock exchange (USE). It was listed following a successful initial public offering (IPO) or issuance of shares that was over subscribed by 200% (www. use.or.ug). As of February 2009, the ownership structure was 80% for Standard Bank Group and 20% for Ugandan nationals and institutions through USE ( %)
1.2 Problem Statement
All quoted companies listed on the Uganda stock exchange are required by the law to disclose more and better information. In particular a firm generates outside finances through improving transparency and standardizing information disclosure as a social responsibility. (Ma Zhengwu, 2005). This however is seen as a way of attracting domestic and foreign capital by issue of shares. This capital is afterwards used by a company in its major operations such as in expanding their markets, development of new products and when modifying their existing products which later generates more revenues or profits. Despite issuing shares on 24th November 2006 Stanbic Bank Uganda full year profit declined by 24%, New Vision(Ojambo, April 27, 2011. The declining performance in Stanbic justified the need for the research to examine its state and the reasons for such economic downturn and come up with recommendations that may help it to regain its financial stability and market dominance in Uganda.
1.3 Purpose of the Study
The purpose of the study was to examine the relationship between information disclosures and financial performance in Stanbic Bank Uganda limited.
1.4 Objectives of the Study
- To establish whether there is proper information disclosure inStanbic Bank.
- To assess the level of financial performance in Stanbic Bank.
- To establish the relationship between information disclosure and financial performance in Stanbic Bank.
1.5 Research Questions
1. Does Stanbic disclose information properly?
2. What is thelevel of financial performance in Stanbic Bank?
3. What is the relationship between information disclosure and financial performance in Stanbic Bank?
1.6 The Scope of the Study
1.6.1 Geographical Scope
The study targetedboth brokers and investors who are engaged with Stanbic Bankshares in Kampala. The study was done in Uganda stock exchange, co-sponsoring brokerage firms, and other institutions that have invested in Stanbic and located in Kampala town.
1.6.2 Conceptual Framework
The framework shows that whencompany discloses more informationto the market, investors get to know the company well which influences them to buy shares of that company (share capital). As a result the company uses this share capital to finance itsoperations, projects and investments which improvesthe firm’s profitability. The company discloses all relevant and material information regarding its operations in its prospectus and annual reports which indicate return on equity, return on investment, and return on assets of the company which provide meaningful analysis of financial performance indicators, that is, profitability ratio, gearing ratio and others.
1.6.3 Subject Scope
The study focused on information disclosure as an independent variable and financial performance as the dependent variable in Stanbic bank Uganda limited.
1.6.4 Time Scope
The study was done from February to July 2011 and concentrated on literature over the years up to 2010.
1.7 Significance of the Study
a)The study will be of great importance to me as a researcher because it will enrich me with knowledge and skills of doing research.
b)To the scholars and academia, the research will help them understand financial disclosures in Uganda.
c)To the company by helping it to understand how information disclosure can aid in building the company’s image and how it can have a positive impact to the company performance through share issue oversubscription.
d)The study will also benefit the general public by helping them evaluate information disclosed by Stanbic Bank’s financial reports and know the right time to buy or sell.
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
In this chapter, a review of literature is done in accordance with the conceptual framework. It entails the theory of different scholars in relation to information disclosure, share capital, the level of financial performance, and the relationship between information disclosure and financial performance.
2.2 Information Disclosure
Disclosure is the process through which an entity communicates with the outside world. It is operationalised as items of information included in annual reports prepared in accordance with requirements of the corporation law, accepted accounting standards or listing rules of stock exchange. Disclosure is ensuring access to information by all interested parties, regardless of the purpose of obtaining the information, through a transparent procedure that guarantees information is easily found and obtained. Also according to (Aksu, 2006) Information disclosure refers to the public dissemination of information indiscriminately. Generally, disclosure can be defined as the communication of information allowing economic actors to obtain information on a firm’s activities and condition.
There are two major categories of disclosure: financial and non-financial. Financial disclosure refers to information relating to company accounts. More recent definitions also include information relating to the interests of a company’s shareholders, such as stock options or managers’ pay (Healy and Palepu, 2001). Non-financial disclosure is less circumscribed and therefore less closely defined. It includes information relating to the company social and environmental responsibility as well as information relating to the firm operating methods or to managers’ health (Healy and Palepu, 2001). Their definition indicates a possible distinction between financial and non-financial information and also between mandatory and voluntary disclosure (these two categories are often related). Withtheseparationoftheownershipofcompanies'resourcesfromtheircontrol,corporateDisclosureisapotentiallyimportantmeansofcommunicationbetweenmanagementand outsideinvestors.
Morepublicinformationisexpectedtoincreasestockliquiditybyreducingtransactioncostsandincreasingthedemandforshares.Moreover,itisexpectedthatincreaseddisclosurewillreducetheuncertaintysurroundingtheestimationofstockreturns.Ceterisparibus,therateofreturnrequiredbyinvestorstoholdthefirm'sshareswilldecrease,hence,thefirm'scostofequitycapitalwillfallandfirmvaluewillrise.ItisalsoarguedthatincreaseddisclosurecaninfluencefirmvaluebyincreasingtheactualcashflowsthataccruetoshareholdersasaresultofareductionInagencyproblems.Increaseddisclosureisexpectedtoreducetheamountofcashflowsthatmanagersandcontrollingshareholdersappropriateforthemselves(Verrecchia,2007),andlowerthecostsofmonitoring;increaseddisclosuremaythereforeincreasethecashflowthatshareholdersreceive(Coffee,1999).
However,providinginformationtothepublicisnotacostlesstask.Amongtheexpensesassociatedwithdisclosurearethecostsofinformationproductionanddissemination,thecostsofweakenedcompetitivenessasaresultofdivulginginformationtocompetitors,andlitigationcostsifthecompanyissuedasaresultofinformationdisclosed.Insomecases, thesecostsofdisclosuremaydominateacompany'sdisclosurepolicy,soanydecisiontoprovidemoreinformationtothepublicshouldbebasedonacarefulcostbenefitanalysis(Botosan,2000;Healy & Palepu,1993).Thus,weassumethatcompaniesevaluatethenetbenefitsofdisclosure.Thetermnetbenefit referstoatrade-offbetweenthecostsandbenefitsassociatedwithdisclosure.Ifthebenefitsofanincreasedlevelofdisclosureexceed(arelowerthan)itsassociatedcosts,apositive(negative)netbenefitresults.
Anumberofstudiesshedsomelightuponotherfactorsthatmightaffectthenetbenefitsofdisclosure.Forexample,studiesdiscusstheroleoftraders'expectationsindeterminingtheeffectsofincreasedinformationtransparency.Insomecasesgreatertransparencycanhaveunintendedconsequences.Insituationswhereindividualsdonotmakedecisionsinisolationbutmustcoordinatewithothers,individualsmustincorporatetheirexpectationsaboutthebeliefsofotherdecisionmakers,whichleadstostrategicuncertainty.Improvementsintransparencycanincreasethisstrategicuncertainty.Thus,althoughincreasedtransparencymayprovideinformationabouteconomicfundamentals,theincreasedstrategicuncertaintymaynegatethesebenefitsofmoretransparentinformation.An annual report is considered to be the most important source of information regarding a company as all the year's activities, financial health and prospects of the company are summarized therein. Information in this annual report falls into two categories: mandatory and voluntary.
2.2.1Voluntary and Mandatory Disclosure
Mandatory information is the subject ofregulation such as corporation law, accounting standards and listing rules of stockexchange. Voluntary information includes all information which an entity voluntarilyprovides in its annual reporting package such as chairman's statement, financial orbusiness calendar, board of directors, management committee, performance highlight,future prospects of company as well as its industry and review of the company'soperation. The information in this report will be of usefulness to the shareholders and theother users in assessing the stewardship or accountability of management for resourcesentrusted to it in order to make economic decisions, (Chandler, 1997).
The issue of information disclosure of corporate annual reports has been the subject of
substantial academic interest. Empirical evidence from these studies have shown that in practice, companies tend tostick closely to disclosure specified by laws or accepted accounting standards. Forinstance, studies revealed that external users rank highly informationpertaining to future expectation but which are not likely to be voluntarily disclosed; andothers found that companies tend to give verylittle information beyond what is mandatory. Further,moresources revealed that neither corporate annual reports northe financial statements within them comprise a dominant source of financialinformation. These empirical studies suggest that the corporate reporting practices areinadequate to satisfy the information needs of users ( Noyem, 1999).
Studies on reporting practices in recent years have also provided insights into general
relationship between corporate characteristics and propensity to disclose relevantinformation voluntarily. For example, (Lo, 2003) hypothesised that firms' voluntary accounting anddisclosure choices are aimed at controlling the interest conflicts among shareholders,debtholders and management. It is held that the extent of these interest conflicts, hencethe incentives behind voluntary accounting disclosure choices, varies with certain firmcharacteristics such as company size, ownership structure, industry type, auditor firm andpublic listing status.On the other hand, some instances permit specific parties to get more information than other parties which call for information asymmetry.